One Thought - Free Money

Almost…  Wireless companies have a continued hunger for cellular sites.  If you are lucky enough to have a location where they can install the hardware and antenna, you are in for a surprise.  Leases with companies such as Verizon will often pay between $1,800 and $2,000 for a site.  Once the lease is signed, there are 3rd party buyers willing to pay a multiple of monthly revenue that can generate a purchase price in the neighborhood of a quarter million dollars ($250,000).  

Typical locations would be on a flat roof, a commercial building, church, vacant commercial property and many more.  Unfortunately for you homeowners, cell sites normally are not located in residential neighborhoods, but that is where churches have an advantage.  They are usually in or close to residential areas and have some type of high steeple.  Be careful of the lease, they are worse than long commercial leases.  They are very one-sided and you should get help negotiating the terms.

One Thought - The #1 Biggest Business Urban Legend

            I can’t think of any subject that I deal with more than non-competition clauses. It comes up with employees, independent contractors, franchisees, shareholders, partners, etc. The problem is, very few get it right.
            Usually what I hear is that non-competition provisions are not enforceable. Answering like a true lawyer- it depends.
             Like so many other issues, California is unique as it is the only state in the entire U.S. that will not enforce these provisions against employees and for the most part, franchisees. This is based on California’s very strong and long running public policy protecting the right to work.
            Non competition clauses can be enforced where some form of “goodwill” is passed from one to another. For example, a corporation (or shareholder) can repurchase a departing shareholder’s stock and enforce a non-competition agreement, or a business owner can sell a business to a buyer who can enforce a non-compete against the seller.
            There are other exceptions. During employment, an employee, cannot compete against his or her employer and is required to abide to a duty of loyalty during employment (but after leaving the job, it is a different story.) Also Confidentiality Agreements, trade secrets, and non-solicitation agreements (of clients) can often be enforced.
            So there is no pat answer to whether non-competition and related restrictions are enforceable.

Remember you START Your Franchise With Zero (0) Customers

I remind prospective Franchisees that the number of customers they have when they open their doors is Zero (0).  Franchises have many benefits and advantages over re-sells (Biz Ops) but this is not one of them. 

It really is a good idea to compare buying a franchise (from the Franchisor) versus buying an up and running Biz Op. Although franchisees often have the benefit of a knowledgeable franchisor, training, on-going support, existing marketing and Logos, (hopefully with some brand recognition), the time necessary to build a customer base is always a major cost and risk. 

You should take a look (probably with the help of a business broker) at existing Biz Ops which have a track record and review their gross revenue, net income, customer base, product acceptance, etc. One approach to comparing the two is to total the following: (i) the cost to purchase a franchise, (ii) all the expenses necessary to open the business, and (iii) the cost necessary after opening to build a customer base to support operating expenses and a reasonable profit (don’t rely on Item 7 of the Franchise Disclosure Document – “FDD”). Then compare that amount to the purchase price for an existing Biz Op. If the cost to buy a Biz Op is less, then consider if the other benefits of a franchise are worth paying the higher price. Finally, consider if your best bet is to buy an existing Biz Op that is also a franchise. 

BUSINESS TRANSACTIONS

Nine Key Steps

     The purchase or sale of a business usually involves such a large amount of money relative to the party's other investment or net worth; that it is a good time to be careful in how you go about conducting the transaction and choose the structure. So let's follow the nine key steps in a business sale/purchase.

     1.  Advisors.  It is always surprising to see many advisors are involved in a business transaction.  Frequently there will be a business broker, escrow agent, appraiser, lender, accountant, buyer (or seller) and, if real estate is involved, then also a title company and real estate broker.

       2.  Pre-Sale Process.  Ideally a seller will start working on the sale long before the business is offered.  The financial statements should be cleaned up, intangible assets trademarks protected, personal expenses reduced, key employees retained on a long term basis, etc.

      3.  Listing the Business.  Most brokers will not place your business on a "multiple listing service", but will use different and more private channels to contact qualified buyers. The broker will want the seller to sign a listing agreement which will include a guarantee by seller that information given the broker (who passes it on to the prospective buyer) is true and accurate. 

      4.  Purchase Documents.  The purchase documents usually consist of the broker's listing agreement, the confidentiality agreement with the buyer, an initial offer plus counter offers, escrow instructions and the final, more complete, documents including promissory note, security agreement, bill of sale, list of assets, intangibles, covenant not to compete, employment agreement for seller, transition work or for retaining key employees and so forth.  Often, at the beginning of the process, the parties will forego an offer document and prepare a letter of intent (“LOI”).  The key for using a LOI is to obtain agreement on those important terms of the sale but not to get too detailed, otherwise the sale process will become delayed and negate the purpose of the LOI, which is to state the basic terms and facilitate moving on to the next step, due diligence and formal documents. 

         5.  Asset or Stock.  This is one of the early decisions to be made since it will set the stage for other aspects of the transaction, especially the tax and liability consequences. This should be agreed upon before the documents are drafted. Document Preparation. When each party has a lawyer after the basic terms are agreed upon, it is the buyer’s counsel that usually drafts the first set of formal documents, since buyer’s have more concerns and will want many more representations from the seller regarding the condition of the business.

         6.  Tax Allocations.  In an asset sale of a business there is a specific method for determining the tax consequences of the parties.  The purchase price is allocated to certain categories of assets, both tangible and intangible.  Each category may have different tax consequences and the amount allocated does necessarily match the fair market value.  For example a large portion of the purchase price will be allocated to goodwill resulting in capital gains for the seller and 15 year "writes off" for the buyer as opposed to a much shorter period (and more beneficial for equipment).  These amounts are negotiated usually with help from the parties' accountant. Suffice it to say, get good tax advice. 

      7.  Due Diligence.  This is the process that a buyer goes through to determine the nature, characteristics and condition of the business.  This is started by the seller providing current and past financial statements, tax returns, contracts, equipment and real estate leases, employment agreements, history of repairs, land reports regarding hazardous waste, American with Disability Act compliance, and so forth.  It is very important to set deadlines to make the information available and for the buyer to complete its review.

          8.  Representatives and Warranties.  There are many issues that can't be determined by looking at a piece of paper, record or contract.  In these cases the buyer will require the seller to make statements regarding the condition or presence of something.    Examples are (i) whether there are any threatened pending lawsuits, claims or governmental actions against the seller and (ii) whether the financial statements are true and accurate.

      9.  Escrow, Bill of Sale and Clearances.  Parties vary on whether they want an escrow by the size of the transaction and may be used in small (e.g., $75,000) transactional, as well as large ones ($15,000,000). If there is inventory the parties will usually file a notice of the sale which is published in a local newspaper (the "Bulk Sale" notice) and also arrange for governmental reports to show that there are no sales, or employee taxes, due (e.g. withholdings), state income tax or liens affecting the business.